Deals

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

Li Ka-shing is increasingly finding his European love affair very one-sided.

I Heart Europe
Li Ka-shing has ramped up his buying of overseas assets in the past five years
Source: Bloomberg

Brussels is widely expected to nix his billion-dollar bet on becoming Britain's top mobile-phone operator, while an ambitious bid to become a driving force in Italy's wireless market faces possible rejection. Would Hong Kong's richest man not be better off sticking to less politically sensitive targets with steady cash flows, like, erm, utilities?

European antitrust regulators will probably on Tuesday sound the death knell for CK Hutchison Holdings' as much as 10.25 billion-pound ($14.8 billion) bid for Telefonica's O2, Britain's second-biggest mobile-phone operator. Combining it with 3 in the U.K., the no. 4 operator CK Hutchison already owns, would have rocketed Li into pole position.

Despite pledges from 3 not to immediately hike prices, the anticipated ruling looks set to be echoed in Italy, where Li is in the midst of another mobile-phone consolidation. There, he's seeking to combine 3 Italia with VimpelCom's Wind Telecomunicazioni, creating a carrier that would rival Telecom Italia and control almost a third of the market.

Superman Calling
CK Hutchison's mobile phone market share in the U.K. and Italy would soar if it bought its rivals
Sources: Morgan Stanley Research

Those were big deals, both in size and significance. A purchase of O2 would, even for the highly acquisitive Li, have been the billionaire's biggest ever, outside of a some $40 billion internal swapping of assets last year.

But a look at Li's overseas deals shows that buying utilities has proven a safer bet than telecoms. Apart from his acquisition of British pharmaceutical chain Superdrug, Li's most successful, and biggest, international purchases have been electricity grids and gas pipelines.

Crossed Wires
CK Hutchison's weighted average cost of capital has been falling, but it still remains above the company's returns
Source: Bloomberg

Li's largest offshore transaction to date was a $9 billion play for Electricite de France's U.K. distribution network. That handed him Britain's No. 1 power network, which supplies electricity to about 20 million homes. Attempts to create a pan-European telecoms network on the other hand, including a $1.7 billion purchase of Orange in Austria and shelling out $1 billion for Telefonica's network in Ireland, have been piecemeal.

Li had a lot more riding on the O2 deal than a fat check. The 87-year-old's 3, while finally in the black, is as Morningstar analyst Dan Baker notes, still ``economically unprofitable,'' meaning the capital required to service the relatively small number of subscribers on its network won't allow for sustainable value-added returns over the longer term. Buying O2 would have delivered as much as $4 billion in cost savings, hugely important in an industry where revenues are shrinking.

And while in terms of returns, as measured by Ebit over assets, CK Hutchison's European 3 foray is slightly more lucrative, coming in at 6.3 percent versus just on 6 percent for the company's infrastructure assets, the fact competition regulators seem intent on blocking consolidation means growth will be hard to come by.

Should both deals be blocked, Morgan Stanley analyst Praveen Choudhary said his forecast valuation for CK Hutchison of HK$93 a share would drop by about HK$9. The conglomerate's stock, down more than 11 percent this year, closed on Friday at HK$92.70.

As it is, being No. 4 in Britain's hotly contested mobile market is neither palatable nor tenable, and Li isn't accustomed to being the underdog. Exiting 3 and sharpening CK Hutchison's deal focus may be a smarter way to win shareholders' affection.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net